A weaker USD helps push commodities higher

Growing expectations that the Fed’s aggressive monetary tightening is coming to an end helped boost sentiment across the commodity complex. A weaker USD also added support.

Copper gained, while aluminium and zinc were also up sharply as the market was buoyed by the prospect of the US Federal Reserve pausing rate hikes due to the banking turmoil. This potential shift in monetary policy is providing some macro tailwinds for the metals complex. The relationship between currencies and commodities has been upended over the past few years. Policies designed to manage the pandemic and the subsequent impact on global inflation led central banks to aggressively tighten monetary policy. Combined with significant supply side issues in commodity markets, the relationship broke down. However, it’s now re-established as those issues subside. This should lead to further USD weakness, which is likely to be a strong tailwind for commodity markets.

The weaker USD also helped push gold higher. The metal has one of the strongest relationships with the greenback and is highly sensitive to interest rate moves. A potential pause in interest rate hikes by the Fed is seeing investors increase their allocation to the precious metal. It’s also finding some support from increased interest in haven assets amid the ongoing banking crisis. An increase in net long positions by speculators has been driven by both new longs and short covering. The inflows into gold-backed ETFs have risen sharply in recent weeks.

Iron ore edged lower amid weakening fundamentals. Top iron ore exporters are expected to increase their shipments in coming months as supply side disruptions ease. This comes following signs of weakening demand. Chinese mills have been lowering their selling prices while spot prices for rebar used in construction have slumped sharply.

Crude oil was up early in the session amid the gains across the broader commodity complex. However, it reversed those gains after the US government warned it may not refill its strategic reserve in the short term. US Energy Secretary, Jennifer Granholm, told lawmakers that refilling the SPR would be difficult this year. However, she said they will look for that low price into the future. The Administration has said previously that it would wait until prices fell below USD70/bbl before restocking the reserves. The market is also becoming increasingly impatient with the rebound in economic activity in China. While travel has picked up sharply, consumer spending remains subdued.

A late winter cold snap helped lift European gas prices. Temperatures across UK, Germany and France are likely to fall about 5oC below seasonal levels, according to Maxar Technologies. This comes as Norwegian gas projects are planning more maintenance work, which is likely to crimp supply. The move in European markets helped push North Asian LNG prices higher.